Setting the right prices for your product is a balancing act. According to Prof Sreelata Jonnalagedda, every business will have to do their homework and determine the factors to define the right price of their products. She has covered some common strategies entrepreneurs can use for pricing their products and services. There are three main categories to take into consideration: price based on cost, competition, and value.

Cost-based pricing– Cost-based pricing involves setting prices based on the costs for producing, distributing, and selling the product. Also important are the different types of costs, fixed and variable (a cost that varies with the level of output) costs for example. The methods commonly used under cost-based pricing are mark-up pricing, break-even pricing and target-return pricing. Under mark-up pricing the selling price is fixed by adding a margin to the cost price of the product. Other approaches to cost-based pricing are break-even pricing, the price at which it will break even and target-return pricing, where the company determines price with a desired target return. Break-even pricing can keep prices very low and can help penetrate new markets or gain rapid market share. Cost-based pricing is a popular strategy among small businesses as it can ensure that costs are covered.

Competition-based pricing –Competition-based pricing, also known as competitive pricing, consists of setting the price of a product based on what the competition is charging. The first step to competitor based pricing is to figure out who your competitors are. When you understand how the top competitors in your market are pricing their products and how that pricing might impact customers’ expectations. Some of the factors that companies take into account are costs, competition, and price sensitivity.

Value-based pricing– Value-based pricing is the setting of a product’s price based on the benefits it provides to consumers. One has to know customer’s  perception of the product or the brand, his reasons for buying, his possible barriers and his triggers to make a decision. Value-based pricing focuses entirely on the customer as the determiner of the total price/value package. The most important factor influencing value-based pricing is customer buying process which includes customer values, customer expectations, and how the customer evaluates price. The second-factor companies should consider is direct and indirect competitions that consumers may use as a basis for price comparisons.

Prof. Sreelata recommends that start-ups should invest time in knowing their customer, product and market and implements a thoughtful strategy before coming up with the right price of their products and services. As pricing decisions can have tremendous implications on your brand image and market position.

Sreelata Jonnalagedda
Associate Professor-Marketing
IIMB